Task 1 → identifying the financial needs and constraints
LH Turtle Limited’s long term goal is to maximise profit, however its daily goal is to survive. So the key to ‘LH Turtle Limited’ surviving in the market is the way the business is financed. ‘LH Turtle Limited’ needs to be developed if they are going to compete with the likes of Wickes, BBQ and Focus.
They can develop by for example by: reallocating to a larger site away from the town centre so that there is more customer parking space. Another way of developing is by more investment in online buying from they website and home delivery, or they could even upgrade their fixed assets and redecorating the store. However, all these potential developments need finance, so there are several ways ‘LH Turtle Limited’ can raise finance. They may also need to raise finance or other reasons such as to cover their overheads, update current assets they have and also pay for any fixed costs they need to pay.
‘LH Turtle Limited’ can raise its finance through short-term financing and long-term financing. Short-term financing is any source of finance that ‘LH Turtle Limited’ has to repay in the next 12 months, for example bank overdraft, three month loan from a director or a third party and any long-term loan that is now due to repaid. Long-term financing is any investment into ‘LH Turtle Limited’ that does not need to be repaid within one financial year.
There are several ways how ‘LH Turtle Limited’ can raise its finance. It can be raised internally or externally.
The main sources of short-term finance for most businesses include the following:
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Asset management: a firm may raise funds by selling off some of its existing assets such as machinery or fixtures and fittings. Because asset sales tend to reduce the ability of a firm to trade, this is a fairly drastic means of raising finance. Initially, ‘LH Turtle Limited’ will certainly not consider this as a way of raising finance; but if the business runs in to trouble; it can always be done. They could sell, for example less used fittings such as gardening tools, shelves and any other DIY supplies. If they are desperate I could sell certain assets and rent others for the short term. This is an internal source of finance.
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Existing shareholders: the use of raising finance from existing shareholders remains an important and often principal source of finance for many private firms. From the notes to the company accounts how that they only earned £62,400 from the business in the year to 31st January 2005. If this is their only source of income then, it is unlikely that they have a sufficient savings to invest a substantial amount in the business. So they have to look at other forms of raising finance, however, they could still use this form of financing if they have no other options. Again this is a internal source of finance.
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Bank Overdrafts – LH Turtle can increase their overdrafts limit. This is where banks lets a business have a negative amount in its account, up to an overdraft limit. However, this could be risky as the banks charge very high interest rates. Also banks have the right to withdraw the overdraft facility at any time, and in some occasions they demand for the repayment of the overdraft immediately. So it could be very difficult for LH Turtle to repay the overdraft so even could be forced out of business.
The main sources of long-term finance for most businesses include the following:
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Banks: Banks would be happy to lend LH Turtle ltd money as long as LH Turtle provides proof of their project. The bank would want a detailed business plan which includes a well supported market research and cash flow forecast which shows how the dept could be repaid. Bank would also want some security, like some assets LH Turtle have, against the loan. So for example, LH Turtle could use some of their fixed assets as security against the loan. However, it is arguable whether the Bank would accept it, so LH Turtle could put for example a director’s house as a security against the loan. In order to pay less interest every month they could take a long-term loan, this would mean they pay less interest every month than a short term loan but would pay a larger amount overall. This is an external source of finance.
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Retained profits: ‘LH Turtle Limited’ can use the profits they have currently got to invest into developing the business. They can only use profits if their profits are greater than their running costs of the business. However, this is less likely as LH turtle currently not making enough profits for reinvestment into the business. In the long-term in order to boost profits they can cut their expenses by inviting tenders to all services the business buys or they can reduce the cost of sales by taking on cheaper less experienced staff. Then again this approach may not be beneficial as more experienced staff help the business improve. This is an internal source of finance.